In an interview with Nikunj Dalmia of ET Now, Vallabh Bhansali, Chairman, Enam Group, says that the market is fairly well-invested. Bhansali tells Dalmia that retail participation could go up further, but the present valuations are not very attractive. Excerpts:

Do you think that domestic equities are expensive?

India is a growing economy. We have structural weaknesses, created over several decades. We will still probably take some time to correct those (weaknesses) and under current circumstances, if the rains get delayed, prices can go up. Some commodities may see scarcity. Now, the bonanza from falling oil prices is getting over. I really do not count really on falling interest rates, but on growth indeed.

The theory remains the same: Money still wants to sit in the safest chariot. If I am going downhill, I will go faster. That is an additional advantage. You have a tailwind behind you. I see the tailwind really sustaining and, therefore, I would not like to think that Indian equities are expensive. Of course, if I can buy them cheaper, of course they are welcome.

Typically a bull market starts when valuations look attractive and then earnings, they surprise us. We have seen that happening in the previous bull market. Do you think that we are on the cusp on an earnings recovery, where the earnings surprise and the demand really will surprise us? It is difficult to talk about it right now because your eyes cannot see that far, but if you can talk about your years of experience here?

Some event or the other may bring down the price of a particular stock, but investors usually come back immediately. I think the predictability in the Indian economy has grown tremendously over the last few years. Investor now wants to take a five-year, 10-year, 15-year view and invest in stocks. The market is fairly well-invested, except the common man. The retail surge may come but at present the valuations are not really of a distressed market.

Now only earnings growth will happen which will not create that kind of momentum that we have finished seeing. But that is okay. In a growth-starved world, if you are still growing at 7-7.5 per cent over a long period of time — our earnings growth is of 10-12 per cent — I will still make handsome money. As an equity investor, my expectations from the market are coming down all the time.

What has worked for us in the past? The complexion of the Sensex is such that it will always grow in handsome double digits because sometimes it is IT, or pharma or domestic stories, which works. But what has worked for us in the last of couple of years is this combination of a weak dollar and growth in IT and pharma. That could be coming to a standstill for variety of factors. Where do you think the momentum now will come for the economy or for the market?

If the economy picks up, the whole economic cycle starts going into infrastructure, housing and consumer and durables and only then the whole cycle plays out. The same cycle can play out brilliantly now. You have seen early moves in Larsen Toubro coming up with slightly better result and the stock is off.

So, the contracting companies are already being targeted. There are even people who are recommending real estate stocks! I think new cycles will happen and while the dramatic stories seem to create an impact of “Oh, something unique has happened,” but they are all a part of the same cycle.

When an economy goes through a structural change, some stocks or some sectors such as infrastructure and real estate go into a deep slumber. But they also emerge strongly. So, it is very likely that some of those sectors will emerge very strongly. The market will find its winners and I have no problem on that.

The IT sector per se has got rebooted as the technology is changing. Old technology is moving out andd the buzz word is ‘disruption and digitisation.’ What could be the face of Indian IT sector in 2020-2021?

You could see new players emerging. IT stocks were once available at cheap multiples at one point of time, but it all changed.So also it could change that. The IT sector could become smaller or it could become highly advanced. Therefore, the jury is still out that whether this manpower-led IT sector is dead and gone. I do not think it is because while the need for technology has remained constant, its delivery is changing.

The technology service providers were doing precisely this: There was always a technology and it was moving generations. Now once it seems to be moving the generation, in this generational move whether the service companies will still have a role because they can see the generational change much better than we can, is a question.

Whether they can create a business out of it is something to be seen.

At worst what may happen is that the growth may slow down. But they will find a formula to limit or freeze their manpower cost. I do not think the heavens are falling really on that sector. The kind of fantastic rewards that we have seen so far may not come for a few years. But I do not see that sector will become irrelevant in a hurry. IT firms will always remain what we call the local issue hedge sector. That advantage will continue with them. Every time you see rupee weakening — it is believed that rupee will continue to weaken 3-4 per cent per cent a year. So if they can grow at 8-10-12 per cent and if we have a 3-4 per cent rupee movement, they are alright.

But the definition of big four TCS, Infosys, HCL Tech and Wipro, could change in the next five years. New companies could be part of that big four, am I right?

I would like to believe that these surprises would come. In the 1990s you did not see Infosys and Airtel and Sun Pharmas’ of the world. But they always come. I think in a free world, businesses get freedom to grow. In that environment, the new boys they are faster.

What do you make of the new FDI laws? Do you think that this time that the gates have been opened and flood of dollars will start at least in sensitive sectors?

One does not know because it depends upon — I have not really tracked those who all are waiting at the gate and who will jump in — the totality of reform. And the totality of attitude in the country today is inviting. The FDI has done well over the last two years. I do not see any reason why FDI will not go up, given the liberalisation process. I think money flow has been growing steadily and I think it will continue to grow, definitely.

Which is one government policy action that do you think the market is underestimating?

I think market is generally right. But it remains cautious on the infra spending that the government has talked a lot about. I think it will have a big impact. The market is right in terms of saying that it wants to see the money on the ground, it wants to see that translating into orders on contractors' books. The market, after seeing famine for so long, is probably right in estimating that. But I think that will make a big-big impact. What the government is talking about on roads, railways, defence, transmission, the renewable energy and things like that, will all have a big impact on the economy.

A real big surprise factor has come from an unexpected source and that unexpected source could also be called ''disruption'. Here I am talking about Patanjali. No one had thought what brand Patanjali could become, both in terms of market share and in terms of revenue. Is that India, the art of innovation, the art of disruption?

I do not think that every Indian brand can hope to achieve what Patanjali has achieved. There is no use going into history, repeating that he was a yogi and what he did at personal level for people that created huge credibility.

So what Patanjali has shown is that the brand building was done by the founder. Therefore his personal personality, sacrifice, effort, if you put a money value to it, they have taken the same number of years and effort and expense as any other company that would have.

They are still subject to the rigours of distribution, quality, innovation, logistics and so on. So just substitute the amount of money that a regular FMCG company or a brand company spends on building, all this by the effort that that Swami Ramdev has put by holding all his camps and putting a huge effort. Otherwise it is just one more company. I do not think that it is a revolution. It is a trend of some kind because you are not going to see someone like his stature, personality and the effort and the connect...That is quite an exceptional thing.

There is a lot of debate about what is the real heal of PSU banks, clean up has happened, they are looking healthier, they have managed to really swallow the bitter pill, if I may say so, but what is your understanding of how deep rooted the problems are and how far are we away from the real recovery there?

Banks were the face of the system and maybe they are getting all the brickbats. But whatever has happened in banks was due to our system. I think Uday Kotak said something brilliantly and hats off to the person.

He talked about crony capitalism and he also talked about crony socialism that is how harmful crony socialism is.

The difficulty that you are seeing in banks is a result of crony socialism. As long as we are reversing that — and when I am saying I mean the system as a whole — the government, the Reserve Bank of India, the new kind of boards, and the social support that let us cleanup — it will definitely get solved. When the system as a whole decides to change direction things will happen.

So if the problem of banks has to be recognised, the problem of the political thinking, the way our governments were run, the kind cronyism of one kind, we have to start changing the constituents. I am sure the result will also change.